Retrenchment Benefits In Singapore: What Employees Are Entitled To

We’re very sorry to hear that you’ve recently been retrenched, or if you feel you’re at risk of being retrenched.

The unfortunate fact is, retrenchment is a difficult but necessary process that companies go through to cut costs and stay afloat during tough times, such as the last global recession in 2009.

During such periods, it’s important to understand what retrenchment benefits in Singapore you may be entitled to, which can help tide you through to your next job.

If you feel you’ve been denied these benefits, be sure to engage a corporate lawyer in Singapore who will help fight your case and ensure that you are properly compensated.

What Is Retrenchment?

The Ministry of Manpower (MOM) defines retrenchment as “the termination of employees due to redundancy or reorganisation of the employer’s profession, business, trade or work”. Examples of such situations include when companies are undergoing liquidation or judicial management.

Employers are required to generally adhere to the Tripartite Advisory on Managing Excess Manpower (TAMEM) and Responsible Retrenchment, which states that they should only use retrenchment as a last resort.

They should have considered alternatives such as redeployment, temporary layoffs, or shorter work weeks first.

Companies are required to notify MOM of their retrenchment exercise within 5 working days of informing their affected employees, so that relevant agencies can reach out to these employees to provide assistance. More information can be found in the Tripartite Guidelines on Mandatory Retrenchment Notifications.

What Are The Retrenchment Benefits In Singapore?

Retrenchment benefits are payments made to employees when their employment is terminated prematurely by their employer. In Singapore, retrenched employees may be entitled to various benefits to help them transition to new employment.

Employees who have worked for 2 years or more at their current company are generally eligible for retrenchment benefits in Singapore. If you’ve worked for less than 2 years, your company may provide a goodwill payment, known as an ex-gratia payment, though this is not guaranteed.

The amount of retrenchment benefit is not fixed by law. It depends on what is outlined in your employment contract or collective agreement if your company is unionised. If there is no provision, it must be negotiated between you (or your union) and your employer.

The typical retrenchment benefit in Singapore is between 2 weeks to 1 month’s salary per year of service, depending on the company’s financial position and industry. In unionised companies, the norm is usually 1 month’s salary for each year of service.

In addition to monetary compensation, retrenched employees may also receive support in the form of career coaching, reskilling opportunities, or access to government assistance schemes, such as the Workforce Singapore (WSG) programmes, which help individuals upskill and find new job opportunities.

Are Retrenchment Benefits Compulsory In Singapore?

While the government strongly encourages companies to provide retrenchment benefits, it is important to know that retrenchment benefits are not compulsory in Singapore.

According to the Employment Act, employees who have been employed for over 2 years are eligible for retrenchment benefits. For those employed for less than 2 years, the company may provide a goodwill payment, known as an ex gratia payment, at its discretion.

The TAMEM and Responsible Retrenchment recommend that companies pay 2 weeks to 1 month’s salary per year of service, depending on the company’s financial position and the industry.

Although this benefit is not mandated by law, the MOM encourages all employers, both unionised and non-unionised, to follow these advisories and provide retrenchment benefits to support affected employees while they search for new jobs.

The amount of retrenchment benefit depends on what is stated in the employment contract, memoranda of understanding, or collective agreement for unionised companies. If there are no such provisions, the amount will be negotiated between the employees (or their union) and the employers.

How Much Should I Receive In Retrenchment Benefits?

If retrenchment benefits are stated in employment contracts or collective agreements, companies are obliged to provide the stated amount.

However, if the amount is not stated in your employment contract, the common practice for retrenchment compensation is usually at least 2 weeks to 1 month’s salary per year of service.

In the event that retrenchment benefits are not paid out accordingly, you may file a claim with the Tripartite Alliance for Dispute Management (TADM). The TADM may also step in to resolve any employment disputes, should there be a need for mediation.

If your company is in the process of winding up, however, you should not file a claim with TADM but with the Insolvency Office instead, or directly with the appointed judicial manager or liquidator.

However, it is not uncommon for some companies to disguise retrenchments as something else to avoid paying retrenchment benefits, which may result in wrongful dismissals. This is an entirely different matter altogether.

How To Calculate Retrenchment Compensation In Singapore?

Calculating your retrenchment compensation in Singapore depends on a few key factors such as your salary, years of service, and any notice period stated in your employment contract.

While there is no fixed formula mandated by law, most companies follow common practices or guidelines provided by the Ministry of Manpower (MOM).

Typically, retrenchment compensation is calculated based on your length of service with the company. The standard recommendation for retrenchment compensation is between 2 weeks to 1 month’s salary per year of service.

However, the exact amount can vary depending on the company’s financial situation and industry norms. Here’s a simple step-by-step guide to calculate your expected retrenchment compensation:

1. Determine your years of service: Calculate how many full years you’ve worked for the company. This will be used as the main basis for your retrenchment benefits calculation.
2. Identify your monthly salary: Use your gross monthly salary (before deductions) to calculate the compensation. If your salary includes variable components like bonuses, these may or may not be considered, depending on your contract.
3. Check your contract for notice pay: If your contract specifies a notice period, this is an additional amount you should be paid upon retrenchment. The employer may either require you to serve the notice period or pay you in lieu of notice.
4. Apply the retrenchment compensation formula: For each year of service, multiply your monthly salary by the number of weeks or months of compensation that your company offers (usually between 2 weeks and 1 month for each year of service).

For example, if your monthly salary is $3,000 and your company offers 1 month’s salary per year of service, and you’ve worked for 5 years, your retrenchment compensation would be:

$3,000 (monthly salary) x 5 (years of service) = $15,000

5. Consider any additional payments: If applicable, include notice pay, unused annual leave, or other benefits outlined in your contract.

What Qualifies As Wrongful Dismissal?

Wrongful dismissals are when the employee is dismissed without just or sufficient cause, such as misconduct or poor performance. Wrongful dismissals include:

• Dismissal on discriminatory grounds, such as age, gender, religion, race, or disability
• Dismissal to deprive an employee of benefits, such as to avoid paying retrenchment benefits or to deprive an employee of maternity benefits
• Dismissal as punishment for an employee exercising their rights, such as reporting their employer for non-payment of CPF or submitting a mediation request to TADM

If you believe you have been wrongfully dismissed, you can file a wrongful dismissal claim with TADM.

Are Retrenchment Benefits Taxable In Singapore?

According to the Inland Revenue Authority of Singapore (IRAS), whether a payment is taxable depends on its fundamental purpose: is it income for services rendered, or is it a capital sum to compensate for the loss of employment?

Taxable Components of a Retrenchment Package

IRAS generally considers payments made in recognition of past services as taxable employment income. You should expect to pay tax on the following:

• Salary in Lieu of Notice: This payment covers the notice period you are not required to serve. It is treated as income you would have otherwise earned and is fully taxable.
• Gratuity and Ex-Gratia Payments: These are typically viewed as rewards for past contributions and loyalty. As they relate to services already performed, they are considered taxable income.

Non-Taxable Components of a Retrenchment Package

Payments that are genuinely for the loss of office or are capital in nature are not subject to income tax.

• Compensation for Loss of Office: This is the core of a retrenchment benefit. If a payment is made specifically because your role has become redundant, IRAS considers it a non-taxable capital receipt.
• Payment for Restrictive Covenants: A payment made in exchange for an agreement that restricts your future actions (e.g., a non-compete clause) is considered capital in nature and is not taxable.
• Outplacement Support: The value of services like career coaching or job search assistance is not taxable, provided that these services are offered only to retrenched staff and there is no cash alternative for those who decline the support.

What To Consider Before And During The Retrenchment Process?

If you are an employee facing retrenchment, it’s important to be prepared and understand your rights. Here are some key things to consider:

Before The Retrenchment Process

1. Review your employment contract: Check if it includes specific provisions about retrenchment benefits in Singapore, notice periods, or other compensation.
2. Understand your rights: The MOM has clear guidelines on retrenchment. For example, employees with at least 2 years of service are generally eligible for retrenchment benefits, while those with less time may receive a goodwill payment.
3. Keep an open dialogue: If your company is unionised, the union will likely be involved in negotiating your retrenchment benefits and ensuring fairness.

During The Retrenchment Process

1. Communication from your employer: You should receive clear communication from your employer about the retrenchment, including your last day of work and what compensation you will receive.
2. Notice period: Make sure you understand the notice period in your contract. Employers are required to pay notice pay and any unused annual leave on your last day of employment.
3. Payment arrangements: Ensure that all salaries, notice pay, and retrenchment benefits are settled on your final day. If you feel your employer is not meeting their obligations, you can seek advice from MOM on retrenchment matters.
4. Post-retrenchment support: Many companies offer job placement assistance, such as helping you find alternative employment through job fairs or career coaching.

The Retrenchment Process For Employers In Singapore

Conducting a retrenchment exercise is one of the most challenging responsibilities an employer faces. A poorly managed process can damage company morale, harm your public reputation, and even lead to legal disputes.

Here is a step-by-step guide for employers in Singapore.

Step 1: Exhaust All Other Alternatives

Retrenchment should always be the last resort. Before proceeding, businesses must genuinely consider and explore alternatives to preserve jobs. These include:

• Redeployment: Moving employees to different roles or departments within the organisation.
• Upskilling and Training: Investing in training programmes to equip employees with new skills for different job functions.
• Flexible Work Arrangements: Implementing shorter work weeks, temporary layoffs, or sabbaticals.
• Managing Wage Costs: Instituting a hiring freeze, removing non-essential overtime, or reducing variable pay components like bonuses.

Step 2: Establish Objective Selection Criteria

If retrenchment is unavoidable, the process for selecting affected employees must be fair, objective, and transparent. Base your decisions on criteria such as:

• Skills, Experience, and Qualifications: Assessing an employee’s ability to contribute to the company’s future needs.
• Work Performance: Using documented performance records and appraisals.
• Redundancy of Role: Selecting employees whose job functions are no longer required.

It is unlawful to select an employee for retrenchment based on discriminatory factors like age, gender, race, religion, or disability.

Step 3: Communicate with Empathy and Dignity

How the news is delivered is as important as the decision itself.

• Notify in Person: Inform affected employees in a private, face-to-face meeting. Avoid impersonal methods like email, text messages, or group video calls.
• Be Clear and Honest: Explain the business reasons for the retrenchment. Be prepared to answer questions about the process and the support available.
• Provide a Retrenchment Letter: The letter should formalise the decision and detail the notice period, the breakdown of the retrenchment package, and information on outplacement support.

Step 4: Offer a Fair Retrenchment Package

While there is no statutory requirement for retrenchment benefits, the prevailing norm is to offer a package to eligible employees (those with two or more years of service).

• Calculation: The typical amount is between two weeks’ and one month’s salary per year of service.
• Goodwill: Consider paying a lump-sum ex gratia payment to employees with less than two years of service.
• Pay in a Timely Manner: All payments, including salary and benefits, should be made on the employee’s last day of employment.

Step 5: Provide Post-Retrenchment Support

Responsible employers support their departing employees’ transition. This non-monetary assistance, known as outplacement support, can include:

• Career counselling and coaching.
• CV writing workshops.
• Providing letters of recommendation.
• Networking opportunities and connecting employees with job placement agencies.
• Allowing paid time off during the notice period to attend job interviews.

Step 6: Notify the Ministry of Manpower (MOM)

Employers with 10 or more employees are legally required to notify MOM if they retrench five or more employees within any six-month period. This mandatory retrenchment notification must be submitted within five working days after the fifth employee is notified of their retrenchment. This allows tripartite partners to provide timely support to affected workers.

What Are The Differences Between Retrenchment And Dismissal

In employment law, the terms “retrenchment” and “dismissal” are not interchangeable. Understanding the distinction is crucial because it determines an employee’s rights, entitlements, and the legal obligations of the employer. The core difference lies in the reason for the termination of employment.

What is Retrenchment?

Retrenchment is the termination of an employment contract due to redundancy. It is an impersonal business decision that centres on the job role, not the individual performing it. A role becomes redundant when it is no longer required by the business to achieve its objectives.

The common reasons for a genuine retrenchment include:

• Business Restructuring: The company is reorganising its operations, leading to the elimination of certain positions.
• Downsizing: The business needs to reduce its workforce to cut costs or manage a decline in revenue.
• Technological Advancements: New technology or automation has made a specific job function obsolete.
• Mergers or Acquisitions: The consolidation of two companies results in overlapping or duplicate roles that need to be removed.

In a retrenchment, the termination is considered to be without fault on the employee’s part. The focus is on the operational needs of the company.

What is Dismissal?

Dismissal, on the other hand, is a termination of employment that relates directly to the individual employee. The decision is based on personal factors such as the employee’s performance, conduct, or capacity to fulfil their duties. The job role itself usually continues to exist and often needs to be filled by a new person.

Grounds for dismissal typically include:

• Misconduct: The employee has breached company policy or the terms of their employment contract (e.g., insubordination, theft, or harassment).
• Poor Performance: The employee consistently fails to meet the required standards of their job, despite being given adequate warning and opportunities to improve.
• Incapacity: The employee is unable to perform their job duties due to long-term illness or a lack of necessary qualifications.

Conclusion About Retrenchment In Singapore

Understanding retrenchment in Singapore is crucial for both employees and employers. Knowing your rights and entitlements, such as retrenchment benefits, severance payments, and notice pay, ensures that you are adequately compensated during this challenging process.

If you have concerns about your retrenchment compensation or feel that you may have been wrongfully dismissed, seeking legal advice is essential. A corporate lawyer can help you navigate your rights and ensure you receive the compensation you are entitled to under the law.

Our corporate lawyers in Singapore at Tembusu Law are well-versed in corporate and commercial law and have extensive experience in employment matters. If you are facing a more serious matter, our best criminal lawyers and divorce lawyers in Singapore can also provide expert support.

Get in touch with us today if you believe you may have been wrongfully dismissed, or if you believe your retrenchment benefits are being withheld from you.

Frequently Asked Questions About Retrenchment In Singapore

How Do We Differentiate Between Termination And Retrenchment?

Retrenchment occurs when an employee is let go due to the redundancy of their role or the company’s restructuring efforts. It typically happens when the employer no longer requires the position and does not plan to refill it in the near future.

On the other hand, termination is a broader term that includes retrenchment but also refers to ending employment for reasons such as poor performance or misconduct. Termination can occur with or without notice, depending on the circumstances and the terms of the employment contract.

Are Part-Time Or Contract Workers Entitled To Retrenchment Benefits In Singapore?

Part-time or contract workers may be entitled to retrenchment benefits, depending on their employment contract and the length of service. In general, employees with at least 2 years of continuous service are eligible for retrenchment benefits.

However, these entitlements are not mandatory under Singapore law, and employers may offer retrenchment benefits to part-time or contract workers on a discretionary or goodwill basis.

Can I Negotiate My Retrenchment Benefits With My Employer?

Yes, you can negotiate your retrenchment benefits with your employer, especially if your employment contract does not specifically outline the terms. In many cases, retrenchment packages are not fixed by law, so there may be room for discussion on severance pay, notice periods, or additional support.

It is advisable to approach negotiations calmly and professionally, and if needed, you can seek assistance from a union representative or legal advisor to ensure you are fairly compensated.

How Does Retrenchment Affect My Central Provident Fund (CPF) Contributions?

If you are retrenched, your employer is still required to make CPF contributions for you during the notice period, provided you continue working. Once your employment officially ends, CPF contributions will stop, and no further payments are required unless agreed otherwise in your employment contract.

It’s important to ensure all outstanding CPF contributions are paid up before your last day of work, as this is a legal obligation for employers in Singapore.